It is a fact of life that if you want to be a major player in the Pilbara iron ore industry you need a lot more than just iron ore. You need trains, as well as your own railroad. Joe Poprzeczny explains.
The Pilbara iron ore industry is dominated by two of the world’s biggest international mining conglomerates, Rio Tinto and BHP Billiton.
Together with the Brazilian mining giant, Companhia Vale do Rio Doce, Rio and BHPB dominate the lucrative worldwide seaborne iron ore trade. These three corporate megastars currently supply about 80 per cent of this trade.
The dominance of Rio Tinto and BHPB in Australia has rarely been challenged and, to date, never successfully. The reason is simple, and it has nothing to do with their huge iron ore reserves.
The key to breaking into the Pilbara’s iron ore industry depends on having accesses to transport facilities so ore can be shipped overseas. In short, a railway line. To be a serious player you need a railroad network or, at the very least, access to one.
Rio and BHPB have such networks. No-one else does. Therein lies the key to their industry dominance – and they know it. They’ve outlaid several billion dollars so as to be able to haul their ore to the coast.
This means would-be challengers – such as recent attempts by Gina Rinehart’s Hope Downs, and Andrew Forrest’s Fortescue Metals Group – have two choices, build their own network or get access to one of those already existing.
The first of these carries a price tag estimated in the order of about $1.5 billion. That leaves the second option, where the issue is whether Rio and BHPB are prepared to help would-be competitors dismantle their dominance of the Western Australian industry.
Not surprisingly, they’re not.
What keeps the challengers’ hopes up, however, is that Rio and BHPB may not be masters of their own fate and where there is a will you’ll meet big-earning corporate lawyers to help find a way.
One such way is found in The Rail Transport Agreement hammered out between the Burke Labor Government and BHPB in 1987, which contains terms and conditions that might yet pry open the door for others wanting a slice of the Pilbara iron ore industry.
Most large-scale mining activity in WA, including in the Pilbara, comes under the terms and conditions of State Agreement Acts.
Successive state governments have appreciated that mining and transport go hand-in-hand in a state as vast as WA. They have also been aware of how costly such transport is, and they didn’t necessarily want to see WA at the beck and call of monopoly (or duopoly) miners in perpetuity.
Governments knew that new players would find mineral deposits that might well be worth exploiting, but may not be large enough to warrant the construction of separate private railroads.
In the iron ore industry it’s only economical to do so if you intend exporting about 45 million tonnes of ore annually.
In any event, duplication is always inefficient, especially if an operating rail network can be shown to have excess capacity.
But keeping new players out of mining forever is also inefficient, and hardly in the best interests of the state.
Hence the decision to include clauses in some State Agreement Acts to require those prepared to lead the way to at least consider at some point to opening up any transport networks they may have built.
In 1987 the Burke Labor government went one step further.
About 20 years after the dawn of the Pilbara’s world-class iron ore industry, that government negotiated The Rail Transport Agreement with BHPB to give more bite to the intention behind their state agreement.
There’s also the possibility of gaining access via the National Competition Council, which has the power to recommend to a federal treasurer that he (or she) declare a railway line open to third parties in the name of competition and full usage of infrastructure.
In the Pilbara’s case there are five separate main lines in two networks that might catch the eye of a regulator such as the NCC or a would-be competitor. They are huge operations to run, not to mention costly. The annual rate of return on capital locked up in haulage is currently about 10 per cent, compared with more than 25 per cent on capital assigned to mining and sale of ore.
Rio’s western network is one example. This is now a 1,200 kilometre-long network with a main line running from Paraburdoo to Dampier via Mt Tom Price. It is crossed at the Robe Overpass by the Pannawonica-to-Cape Lambert port line, which was once owned by North Mining but now belongs to Rio.
Paraburdoo and the Channar mine are linked by a 20km overland conveyor belt that takes crushed Channar ore for transport by rail to Dampier along with Paraburdoo ore.
North of Mt Tom Price is a second east-west spur that also belongs to Rio. This one runs from Brockman No 2 and Nammuldi in the west to Yandicoogina in the east.
The West Angelas deposit, once owned by North Mining (now by Rio), is linked by a separate spur to this line.
An unusual aspect of the Brockman/Nammuldi-to-Yandi-coogina spur is that it crosses, at Maranilla Creek, a BHPB network spur line that services BHPB’s Yandi and MAC deposits. This is the only point at which the two private rail networks meet.
Sharing the Pilbara with Rio’s line is BHPB’s eastern network, a 700km-long network whose main line runs from Nelson Point to the Newman ore bodies, from where it forks to Mt Whaleback and Jimblebar, formerly Lang Hancock’s McCamey’s Monster.
Midway along the main line is a spur that runs off in a south-westerly direction to BHPB’s MAC and Yandi mine sites and it is this one that crosses Rio’s network at Maranilla Creek.
The BHPB network also includes a near-coastal spur once owned by the Goldsworthy Mining Company and which runs from Yarrie and crosses the main line near Finucane Island.
For rivals eager to gain access to these networks, each of the two backdoor approaches to these networks has its drawbacks.
If the NCC is persuaded to recommend a line be declared open, and the federal treasurer accepts that recommendation, would-be iron ore miners will still have to find their own wagons to haul their ore. This is because line owners cannot be forced by the NCC to haul someone else’s ore.
The State Agreements Act route potentially gives access to both rail lines and wagons but only if all parties can agree on a price for the haulage service.
The complicated nature of these methods has not stopped would-be miners from trying. There have been four separate attempts by third parties to get access to the Pilbara railway networks.
Little is known about the late Lang Hancock’s first attempt to secure rail access. It was based around confidential negotiations with BHP, now BHPB, and was linked to his dealings with Nicolae Ceaucescu’s Communist Romania in the 1980s.
It’s important to note that
his family company, Hancock Prospecting, is the recipient of royalties from several mining operations being undertaken by Rio. This meant he was able to bankroll a bid to break into BHPB’s network.
Mr Hancock arranged for the construction of an iron ore loading facility in Romania’s Black Sea port of Constanza, which was linked to a barter deal under which he obtained a fleet of iron ore carrying wagons, some still rusting in the open near Port Hedland.
Negotiations came to nothing, however, and Mr Hancock finally sold his McCamey’s Monster deposit, 42km east of Newman Ore bodies, to BHPB, which renamed it Jimblebar.
The next attempt came in 1998 when the long-established North Mining, which owned 53 per cent of Robe River Iron Associates, was joined by Gina Rinehart’s Hope Downs Management Services. The aim was to have segments of Rio’s Western Network declared open.
North Mining had a working mine at Pannawonica and sending its ore by rail to Cape Lambert. However, it wished to extend its operations to reserves at West Angelas, which are situated south of BHPB’s MAC deposit and near Rio’s Yandicoogina operation.
To realise that ambition, North Mining proposed building a short spur line to Rio’s east-west spur, linking its Yandicoogina and Brockman No 2 and Nammuldi deposits to the Paraburdoo-to-Dampier line. When North’s ore trains reached Robe Overpass they would again use their Pannawonica-to-Cape Lambert line.
Mrs Rinehart, through HDMS, used this opportunity to team up with North Mining because if North had succeeded, ore from her nearby Hope Downs deposit could have been similarly carted to Dampier.
But Rio and its lawyers went to the Federal Court, and won.
The NCC responded by appealing on North Mining’s behalf but on the morning the appeal was to be heard, North Mining inexplicably withdrew from the case. About a month later Rio bought out North, leaving the NCC high and dry.
But Mrs Rinehart refused to concede that easily, since she had spent big on lawyers in backing North, which had inexplicably gone to water and then sold out to Rio. Rio responded to her stand by agreeing to meet her legal costs, thereby leaving her without a complaint.
Because Mrs Rinehart’s Hope Downs reserves are close both to a Rio and a BHPB spur line, she took the next obvious step, to gain access through the State Agreement Act – Iron Ore (Mount Newman) Agreement Act 1964 and the Burke government’s 1987 Rail Transport Agreement to have the nearby BHPB line declared.
BHPB’s lawyers initially took the position that that act only required them to agree to haul ore for an actual producer. HDMS, at that time, was only an intending producer. Far from being dissuaded, however, Mrs Rinehart appealed to the WA Supreme Court, which ruled in her favour.
Precisely what happened after her win has never been fully disclosed.
But it would only have guaranteed Mrs Rinehart the opportunity to negotiate. If agreement could not be reached on freight rates, tonnages and the like, that would have been that. With Mrs Rinehart deciding last month to enter a joint venture with Rio to develop Hope Downs, her interest in gaining access to a rail network was finally resolved, albeit not via a declaration but through a joint venture.
Fortescue Metals Group is the latest would-be miner to challenge for rail access. Its bid, which is still in progress, hinges on the NCC and promises to be a formidable challenge to BHPB.
FMG, which already bills itself as “the new force in iron ore”, was founded two years ago by long-time Perth mining identity Andrew Forrest.
FMG has huge ore reserves east of the BHPB network, near Cloud Break, and plans building its own railway line to Anderson Point, which is between BHPB’s Finucane Island and Nelson Point facilities at Port Hed-land. In the interim, FMG wants BHPB’s line declared so it can mine Mindy Mindy, near the Newman ore bodies.
If FMG succeeds where Mrs Rinehart failed, the BHPB network would become a target for owners of several other nearby deposits, including: the Aquila/API Group (four tenements); Iron Ore Holdings (three tenements); Consolidated Iron Ltd (three tenements); Ausi Iron Pty NL (one tenement); and Yilgarn Mining WA Pty Ltd, (one tenement).
An FMG victory, therefore, has the potential to move the eastern Pilbara down the path envisaged by successive state governments since the 1960s.
FMG’s attempt is being undertaken on behalf of Pilbara Iron Ore, a joint venture between FMG and Consolidated Minerals. Furthermore, FMG has a subsidiary, The Pilbara Infrastructure Pty Ltd, which it envisa-ges will eventually haul ore for it and other miners.
FMG envisages TPI Pty Ltd owning its rail network and when operational it will seek to haul ore for other miners, so will behave differently to Rio and BHPB.
Such an unprecedented move in the Pilbara means one or even both Rio and BHPB will feel compelled to also enter the ore haulage market by hiving-off their networks as separate corporate entities like TPI.
Clearly a great deal hinges on FMG’s moves now before the NCC and the courts.
Feasibility study for Grange Albany pipe
ALTHOUGH the battle between Pilbara miners hinges around the critical issue of railroads to move iron ore to the coast, further south, near Albany, there’s a proposal to pipe ore to port.
On first inspection such a proposal could seem a little far fetched .
But it’s not. Far from it.
Iron ore is already being piped to Port Latta in Tasmania’s north-west from a mine at Savage River, which is 85 kilometres from the port.
And several years ago, Asia Iron considered piping ore mined over 200km away, at Mt Gibson, to Geraldton.
Early this year, Grange Resources Ltd announced a $13 million feasibility study for the piping of ore from its Southdown magnetite project, 90km north-east of Albany.
Grange began as Sabminco NL in 1986 and 10 years later gained listing on the Berlin Exchange.
It is proposing that its Southdown resource be mined at an annual rate of 17.8 million tonnes with magnetite concentrate transported to Albany through a buried slurry pipeline similar to the one between Savage River and Port Latta.
In Albany the magnetite concentrate would be dewatered and stockpiled in an enclosed shed and await shipment.
Water recovered from the concentrated slurry would be returned to the mine site through a second pipe for re-use.
Grange’s outlay on the Southdown mine, pipelines, Albany port complex, and Malaysian processing facilities is expected to reach $800 million.
The project’s feasibility is to be completed before Christmas with statutory approvals targeted for March 2006.
Grange has appointed Geoffrey Wedlock as managing director.
Mr Wedlock was formerly with BHP Iron Ore, after which he transferred to Portman Mining, which rails iron ore from Koolyanobbing for shipment from Esperance.
When announcing Grange’s bankable feasibility study for Southdown in February Mr Wedlock said: “Iron pellet consumers in countries such as Malaysia and China are currently serviced from very distant supplies in Brazil and Sweden.
“Having a source of magnetite concentrate from Australia creates comparative shipping freight advantages for Grange.
“If the project proves viable we would plan to commence construction with the view to beginning exports in 2008.”
Grange began test drilling last November and plans to continue testing its deposits throughout this year to determine the extent of the mineralisation over its six kilometres of leases.
In April it was reported saying it would spend $5 million to buy the property covering Southdown, since the reserves were on freehold land.
The company has entered into a Heads of Agreement to acquire land in the port city of Kemaman in the Malaysian state of Terengganu, with plans to develop an iron pellet plant.
The all up outlay for Southdown, including the pipeline to Albany port and related facilities, are expected to exceed $400 million.
